Question

If the price level increases in the United States relative to foreign countries, then American consumers will

purchase more foreign goods and fewer U.S. goods. This statement describes:
A) the output effect.
B) the foreign purchases effect.
C) the real-balances effect.
D) the shift-of-spending effect

Answer 1

The statement describes the 'foreign purchases effect', which occurs when an increase in the U.S. price level relative to other countries leads to more imports and fewer exports, resulting in reduced net export expenditures.

Step-by-step explanation:

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement most accurately describes the foreign purchases effect. This effect is part of international trade dynamics and specifies that when domestic prices rise relative to those in other countries, consumers tend to find imports more attractive price-wise, therefore increasing the quantity of imports and reducing domestic consumption. Conversely, U.S. exports will become more expensive and thus less attractive to foreign buyers, leading to a reduction in export volumes. As such, a higher domestic price level, compared to international price levels, will lead to a decrease in net export expenditures.